Bonds a super tax back-up

Now that we know the coalition will form Government in the 45th Parliament, we can at least start to think about what kind of legislation will be passed.

It is clear Malcolm Turnbull’s planned changes to superannuation may be changed to accommodate the new Senate and his own backbenchers. Regardless, I think it is likely wealthier investors will need to consider alternative investments to complement their super.

Reducing tax breaks for the wealthy means financial advisers will need to find ways in which high net-worth clients can complement smaller contributions to super with other tax-friendly structures.

There are a number of options available, including family trusts and negative gearing. But one which is particularly suited for consideration by investors with a medium to long-term investment horizon is investment bonds.

Investment bonds, like managed funds, allow for investment in a range of asset classes. However, like superannuation, tax is paid within the investment bond structure, and not by the investor, at the corporate tax rate of 30 per cent.

Franking credits and tax deductions can also reduce the effective tax rate still further. Additional contributions can be made to the bond each year and, if it is held for 10 years, no personal tax is payable on the principal or earnings.

The proposed reduction in the annual concessional contribution cap from $30,000 or $35,000 for the over 50s to a flat $25,000 a year means those contributing $35,000 a year in the past could consider contributing the excess $10,000, or even more, into an investment bond.

There is no limit to the initial investment. The investor does not need to include the bond in their annual tax return and after 10 years all the proceeds from the bond, both capital and earnings, are personally tax free.

The reduction in the non-concessional cap from $540,000 every three years to a lifetime limit of$500,000, backdated to July 2007, means investors who have reached their limit will need to review their options.

Again, investment bonds can help. There is no limit to what can be contributed in the first year, and additional annual contributions of up to 125 per cent of the previous year’s contribution are allowed.

If the investor wishes to with-draw the proceeds after 10 years, they are free of any extra tax and their adviser can establish a withdrawal program of this income, if the investor doesn’t want to take the full proceeds as a lump sum.